Delhi High Court
Kkspun India Ltd vs Ofb Tech Private Limited & Ors. on 19 September, 2022
Author: Anup Jairam Bhambhani
Bench: Anup Jairam Bhambhani
NEUTRAL CITATION NO: 2022/DHC/004003
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 19th September, 2022
+ CS(COMM) 323/2022
KKSPUN INDIA LTD .....Plaintiff
Through: Mr. Darpan Wadhwa, Senior
Advocate with Ms. Meghna
Mishra, Mr. Jatin Mongia, Mr.
Ankit Rajgarhia, Mr. Tanin Mehta
and Mr. Abhishek Grover,
Advocates.
versus
OFB TECH PRIVATE LIMITED & ORS. .....Defendants
Through: Mr. Vikas Singh, Senior Advocate
with Mr. Varun Singh, Ms.
Deepeika Kalia, Ms. Priyanka
Khosla, Mr. Ytharth Kumar, Mr.
Kapish Seth, Mr. Mrityunjai Singh
and Ms. Alankriti Dwivedi,
Advocates for defendant No.1.
CORAM:
HON'BLE MR. JUSTICE ANUP JAIRAM BHAMBHANI
J U D G M E N T
(Judgment released on 01.10.2022) ANUP JAIRAM BHAMBHANI, J.
I.A. No. 7704/2022 & I.A. No. 9797/2022 By way of I.A. No. 7704/2022 filed under Order XXXIX rules 1 & 2 of the Code of Civil Procedure, 1908 („CPC‟, for short), the plaintiff seeks an ad-interim order of injunction staying the operation and effect of demand letters dated 09.05.2022 issued by defendant No. 1 to defendants Nos. 2 to 6, which (latter) are CS(COMM) 323/2022 Page 1 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 banks; and restraining defendant No. 1 from invoking and/or encashing 24 Nos. Bank Guarantees, aggregating to Rs.41,21,57,263/- furnished by the plaintiff to defendant No. 1 under 06 Nos. Purchase Orders.
2. Since an ex-parte, ad-interim order dated 13.05.2022 was made in the matter, restraining defendants Nos.2, 3, 4 and 6 from releasing any amounts against the aforesaid Bank Guarantees, defendant No.1 has filed I.A. No. 9797/2022 under Order XXXIX Rule 4 CPC seeking vacation of that order.
3. For completeness, it may be mentioned that before such order was made, the 01 No. bank guarantee issued by defendant No. 5 had already been encashed; and therefore no restraint order was made in respect thereof.
4. Notice on these applications was issued on 13.05.2022 and 20.06.2022 respectively; whereupon reply and rejoinder have been filed by the contesting parties viz. by the plaintiff and defendant No. 1 in the above applications.
Brief Facts
5. By way of a brief background, the genesis of the disputes between the parties is as follows:
(a) Defendant No.1 placed 06 Purchase Orders upon the plaintiff for manufacture and supply of MH covers and frame, manholes, IC chambers, RCC pipes, HSC chambers, CS(COMM) 323/2022 Page 2 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 precast boxes, culvert boxes and jacking pipes and also for manufacture and supply of HDPE T-Grip liners, HDPE pipes and DWS Pipe-SN8 Class DN, upon certain terms and conditions;
(b) In compliance of clause 2.6 of the purchase orders, defendant No. 1 provided to the plaintiff mobilisation advance, in lieu whereof the plaintiff furnished to defendant No. 1 advance bank guarantees; and furthermore, in terms of clause 2.7 of the purchase orders, the plaintiff furnished to defendant No. 1 performance bank guarantees; being a total of 24 bank guarantees in the aggregate sum of Rs.41,21,57,263/-;
(c) It is the plaintiff‟s case that it duly supplied goods to defendant No. 1 of a total value of Rs. 81,86,32,711/-, against E-invoices and E-way bills as generated on the GST Portal; however, instead of adjusting the mobilisation advance pro-rata against the goods supplied, defendant No. 1 sought to adjust the entire amount of the mobilisation advance, whereby the plaintiff was left with no advance amount despite having furnished advance bank guarantees against such advance and also having supplied goods worth Rs.81,86,32,711/-;
(d) Subsequently on 10.05.2022 the plaintiff learned that defendant No. 1 had issued to defendants Nos. 2-6, namely the banks that had issued the bank guarantees, demand letters invoking all such guarantees, falsely stating that the CS(COMM) 323/2022 Page 3 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 plaintiff had failed to fulfil its commitments under the purchase orders;
(e) It is the plaintiff‟s case that the defendant has paid only Rs.
54.31 crores against goods and material worth Rs. 81.86 crores having been supplied to it by the plaintiff, meaning thereby that an amount of Rs. 27.10 crores is, in any case, owed by defendant No. 1 to the plaintiff;
(f) The plaintiff further contends that by Addendum dated 18.12.2021 issued to 03 Purchase Orders, defendant No. 1 in fact increased the scope of work allotted to the plaintiff, meaning thereby that defendant No.1 was satisfied with the goods and material supplied to it by the plaintiff;
(g) The plaintiff also submits that defendant No. 1 has never engaged in any correspondence with the plaintiff raising any issues as to the supplies made under the purchase orders; and debit notes of only about Rs.2 crores have been issued by defendant No. 1 in Feb-March 2022 to the plaintiff against allegedly defective goods, which also the plaintiff contends, were issued mala-fide, since no complaint as to the quality of the goods supplied was ever received by defendant No.1 from its customers; and
(h) It is the plaintiff‟s contention that since defendant No. 1 has illegally already encashed bank guarantees of Rs. 18.27 crores out of the total bank guarantees for Rs. 41.21 crores, the remaining bank guarantees for Rs.22.92 crores still remain, which must be protected from unlawful encashment.
CS(COMM) 323/2022 Page 4 of 28This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 Plaintiff's Submissions
6. The plaintiff seeks injunctive relief in relation to the bank guarantees on the following principal grounds:
(a) That the invocation of the bank guarantees is vitiated on account of fraud, inasmuch as defendant No. 1 has first adjusted the entire amount of mobilisation advance against the goods supplied, instead of adjusting the said amount pro-
rata, thereby leaving the plaintiff with no mobilisation advance remaining, and is now also seeking to encash the advance bank guarantees furnished, which is evidence of fraudulent conduct on the part of defendant No. 1;
(b) That defendant No.1 has sought to invoke the advance bank guarantees without complying with the pre-conditions and terms of such guarantees, which specifically require that payment against the bank guarantees would be made to defendant No. 1 only "against any losses or damages suffered" by defendant No. 1 on account of the plaintiff's breach of any terms and conditions of the purchase orders. It is the plaintiff's contention that defendant No. 1 was specifically required to mention that it had suffered loss or damage in the notice invoking the bank guarantees, which it has not done. It is contended that since admittedly, defendant No.1 has received goods worth Rs. 81.86 crores but only paid Rs. 41.21 crores to the plaintiff, there is no question of defendant No.1 having incurred any loss or damage entitling CS(COMM) 323/2022 Page 5 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 it to invoke the advance bank guarantees. More particularly, it is pointed-out that the letters invoking the bank guarantees do not contain any narration as to defendant No. 1 having incurred any such loss or damage. It is therefore argued that the invocation of the bank guarantees is not in accordance with the terms thereof; and is accordingly bad in law;
(c) That furthermore, the invocation of the performance bank guarantees is also bad in law since defendant No. 1 has not made-out a case of non-performance on the plaintiff's part which specifically require that payment against the bank guarantees would be made to defendant No. 1 only if the plaintiff "fails to fulfill its commitments in accordance with the said work order and other connected agreements"; and since, admittedly, defendant No. 1 has not made complete payment towards the goods and material supplied, the plaintiff could not have been expected to supply any further goods or material until full payment for the goods and material already supplied was made by defendant No. 1. Attention in this behalf is drawn to sections 31 and 32 of the Sale of Goods Act, 1930 to contend that an „unpaid seller‟ has no obligation to perform its obligations, submitting that defendant No.1 has not paid to the plaintiff for invoices raised for goods supplied from 19.11.2021 to 26.02.2022. It is the plaintiff's contention that the unpaid invoices aggregate to about Rs.27.10 crores;
CS(COMM) 323/2022 Page 6 of 28This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003
(d) That as evidenced by the ledger for the period 01.04.2020- 12.05.2020 maintained by the plaintiff in respect of defendant No. 1‟s account, it is pointed-out that a net amount of Rs. 19,35,307/- shows as owed by defendant No. 1 to the plaintiff, since against a total owing of Rs. 81,86,32,711/- towards goods supplied defendant No. 1 has paid Rs.81,66,97,404/- after adjusting the mobilisation advance given to the plaintiff. The plaintiff has also placed on record several invoices evidencing supply of goods to defendant No. 1, corresponding to the entries contained in the ledger. It is submitted that defendant No. 1 has neither filed its own ledger account in relation to the plaintiff; nor has it offered any alternate calculation to dispute the plaintiff‟s ledger account. Defendant No. 1 has instead only offered a bald denial1 to say that: "...the claim that advance mobilisation has been adjusted against the purchase order is false and misleading.", claiming instead that the plaintiff is holding an excess of about Rs. 13 crores against goods worth about Rs. 81 crores supplied. It is contended therefore, that special equities are made-out in favour of the plaintiff, since irreparable harm and injury will be caused to the plaintiff if the invocation and encashment of the bank guarantees is not restrained, since after the adjustment of the entire mobilisation advanced against invoices raised, defendant 1 cf. Para 7 of the Brief Facts in the Written Statement dated 02.06.2022 of defendant No.1.
CS(COMM) 323/2022 Page 7 of 28This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 No.1 is not entitled to additionally invoke the advance bank guarantees.
Defendant No. 1's Submissions
7. Opposing any restraint on invocation of bank guarantees, on the other hand, defendant No. 1 has made the following submissions:
(a) That the bank guarantees furnished by the plaintiff to defendant No. 1 were „irrevocable‟ and „unconditional‟ and could have been invoked in the event the plaintiff/contractor failed to perform the contract. It is argued that the advance bank guarantees categorically stated that they could also be invoked for future losses; and the performance bank guarantees did not contain any requirement that invocation could be done only if there was reference to losses incurred by defendant No.1;
(b) That at the time of amendment of the purchase orders, whereby the scope of work to be performed by the plaintiff was revised on 18.12.2021 and the value of the purchase orders was increased to Rs.310 crores, it was specifically stated in clause (e) of the Addendum to the purchase orders that the plaintiff/manufacturer/contractor had agreed to waive-off its right to protest or raise any dispute in relation to defendant No. 1‟s right to invoke the bank guarantees in question;
(c) That though goods to the tune of Rs. 81,86,32,711/- had been supplied by the plaintiff to defendant No. 1, the goods CS(COMM) 323/2022 Page 8 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 so supplied were at times defective, for which debit notes have been duly issued to the plaintiff;
(d) That realising that the plaintiff would default in making supplies under the purchase orders, defendant No.1 issued three invocation notices, all dated 09.05.2022to defendants Nos. 2 to 6 banks, invoking the bank guarantees, which were duly acknowledged by defendants Nos. 2 to 6 on 10.05.2022;
(e) That the invocation notices so issued clearly stipulate that the bank guarantees were being invoked due to failure on the plaintiff's part to fulfill its commitments under the purchase orders; and that accordingly, defendants Nos. 2 to 6 were duty-bound to honour the bank guarantees. However, in violation of RBI‟s Master Circular dated 23.07.2004 and the terms of the bank guarantees themselves, defendants Nos. 2 to 6 did not honour the same in a time-bound manner;
(f) That order dated 13.05.2022 made in the present matter, erroneously granted an ex-parte, ad-interim injunction restraining defendants Nos. 2, 3, 4 and 6 from releasing any amounts towards the bank guarantees;
(g) That since the amended value of the purchase orders is approximately Rs. 310 crores, with no extension of time specified for performance of the agreement; and admittedly, as of date, the plaintiff has only supplied goods/material worth about Rs. 81.86 crores; and no goods or products have been supplied since January 2022, the plaintiff has evidently CS(COMM) 323/2022 Page 9 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 not fulfilled even 25% of the purchase orders and is therefore clearly in default;
(h) That as per the Addendum to the purchase orders, the plaintiff has waived its right to protest or raise any dispute in relation to the defendant No. 1‟s right to invoke and encash the bank guarantees; and the plaintiff is therefore not entitled to seek any relief by way of the present suit;
(i) That the ledger account furnished by the plaintiff is a "self serving ledger statement" and the plaintiff‟s claim that it has received only Rs 54.31 crores is not supported by any documents2.
(j) That no case of any irreparable harm or injury is made-out in favour of the plaintiff and the interim order requires to be vacated;
(k) That furthermore, the interim relief granted to the plaintiff by order dated 13.05.2022 is in effect the final relief prayed for; and therefore such relief ought not to have been granted in the first place, since the Hon‟ble Supreme Court has deprecated the practice of granting interim orders, which in effect give the principal relief sought in the proceedings, merely because a prima-facie case has been made-out, without taking into account the balance of convenience, public interest and a host of other considerations;
2cf. Para 1 of Preliminary Objections in rejoinder dated 05.07.2022 to I.A. 9797/2022.
CS(COMM) 323/2022 Page 10 of 28This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003
(l) That on point of law, where an unconditional bank guarantee is given in the course of commercial dealings, the beneficiary is entitled to realise the amount comprised in the bank guarantee irrespective of any underlying dispute between the parties;
(m) That the invocation letters issued by defendant No.1 were in consonance with the terms in the bank guarantees and there is no basis to injunct the invocation;
(n) That apart from the above, proper court fee, commensurate with the value of the bank guarantees which are to the tune of approximately Rs. 41 crores has not been affixed on the plaint; and the suit itself has been undervalued at about Rs.2.10 crores, on which ground alone, the plaint is liable to be rejected;
(o) That the restraint on invocation of the bank guarantees is contrary to the law laid down in that behalf by the Hon‟ble Supreme Court, since invocation of a bank guarantee can be injuncted only in two exceptional circumstances, viz.:
i. In case of fraud in connection with the bank guarantee, which would vitiate the very foundation of such bank guarantee; and ii. Where encashment of a bank guarantee would result in irretrievable harm and injustice to one of the parties, in circumstances where the harm or injustice contemplated is of such an exceptional and CS(COMM) 323/2022 Page 11 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 irretrievable nature as would override the terms of the guarantee;
(p) That furthermore, it is settled law, that bank guarantees are independent contracts between bank and the beneficiary; and a bank is always obliged to honour its guarantee, as long it is an unconditional and irrevocable one;
(q) That lastly, it has been held by a decision of this court itself, that any reference to a dispute between the parties relating to the performance of the contracts, is irrelevant to the issue of invocation of a bank guarantee.
8. In support of their rival contentions, the plaintiff and defendant No. 1 have cited judicial precedents as referred to below.
Precedents cited by Plaintiff
(a) Hindustan Construction Co. Ltd. vs. State of Bihar &Ors.3, on the proposition that the invocation must be in terms of the bank guarantee; and that when the lapse is on the part of the invoking party, special equities would lie in favour of the other party;
(b) Ansal Properties & Industries (P.) Ltd. vs. Engineering Projects (India) Ltd. 4 , on the proposition that when invocation is not in terms of the bank guarantee and does not 3 (1999) 8 SCC 436 4 (1997) (41) DRJ 618) CS(COMM) 323/2022 Page 12 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 fulfill the requirements thereof, the invocation would be liable to be rejected;
(c) Emco Limited vs. Malvika Steel Limited & Ors 5 , on the proposition that a court would have territorial jurisdiction to injunct the invoking party if the bank guarantee was issued to the other party within the territorial jurisdiction of the court;
(d) Union of India vs. Basic Tele Services Ltd. & Anr.6 and M/s V. K. Constructions Works Ltd. vs. The Bank of Rajasthan Ltd. &Anr.7,on the proposition that the terms of the bank guarantee determine whether the same is to be encashed for the entire amount or for the amount of default or losses suffered by the invoking party;
(e) Hindustan Steelworks Construction Ltd. vs. Tarapore & Co. &Anr.8,on the proposition that courts can interfere in the invocation of a bank guarantee if the party proves special equities in its favour;
(f) Humboldt Wedag India Pvt. Ltd. vs. Dalmia Cement Ventures Ltd.9, on the proposition that if a party establishes the existence of fraud played by the invoking party, which 5 (2012) SCC OnLine Del 5763 6 (2012) SCC OnLine Del 4499 7 ILR (1993) 1 Del 365 8 (1996) 5 SCC 34 9 (2010) 119 DRJ 114 (Del) CS(COMM) 323/2022 Page 13 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 would cause gross injustice, then courts can restrain the encashment of the bank guarantee;
(g) Dwarikesh Sugar Industries Ltd. vs. Prem Heavy Engineering Works (P) Ltd. & Anr.10, on the proposition that if encashment of an unconditional bank guarantee results in irretrievable harm or injustice to one of the parties, courts can restrain the encashment of the bank guarantee;
(h) Shripati Lakhu Mane vs. Member Secretary, Maharashtra Water Supply and Sewerage Board & Ors. 11 and Shanti Builders vs. Ciba Industrial Workers 'Co-operative Housing Society Ltd. 12 , on the proposition that when a contract contemplates reciprocal promises, refusal to continue execution of the contract unless reciprocal promises are performed, cannot be said to be abandonment of the contract.
Precedents cited by Defendant No. 1(a) UP Stage Sugar Corporation vs. Sumac International Ltd.13 ,on the proposition that in the course of commercial dealings when an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realise the same irrespective of any pending disputes;
10(1997) 6 SCC 450 11 (2022) SCC OnLine SC 383 12 (2012) SCC OnLine Bom 736 13 (1997) 1 SCC 568 CS(COMM) 323/2022 Page 14 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003
(b) Standard Chartered Bank vs. Heavy Engineering Corporation Ltd.14, on the proposition that a bank guarantee being an independent contract between the bank and the beneficiary, the bank is obliged to honour the bank guarantee as long as it is an unconditional and irrevocable one;
(c) State of UP & Ors. vs. Ram Sukhi Devi 15 , on the proposition that the final relief should not be granted at an interim stage only because a prima-facie case is made-out without considering the balance of convenience, public interest and a host of other considerations;
(d) M/s Garg Builders vs. Hindustan Prefab Ltd. &Ors.16, on the proposition that the original underlying dispute between the parties is irrelevant insofar as the stay of invocation of a bank guarantee is concerned;
(e) Vinitec Electronics Private Ltd. vs. HCL Infosystems Ltd.17, on the proposition that there has to be a specific plea as to whether the bank guarantee is unconditional or unequivocal or that the invocation of the bank guarantee would cause irretrievable injury, irretrievable injustice to the concerned party or that special equities exist in favour of the party.
14(2020) 13 SCC 574 15 (2005) 9 SCC 73 16 OMP (I) (Comm) No. 200/2021, 2021/2021 & 202/2021 (Delhi High Court) 17 (2008) 1 SCC 544 CS(COMM) 323/2022 Page 15 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 Discussion
9. In the opinion of this court, the decision of the present matter turns on the following four issues :
(a) Were the Advance Bank Guarantees and the Performance Bank Guarantees furnished by the plaintiff to defendant No.1 „unconditional‟; and if so, what was the mode, manner and procedure provided for their encashment?
(b) In the context of the answer to issue (a) above, did defendant No.1 validly „invoke‟ the bank guarantees?
(c) Do any „special equities‟ arise in favour of the plaintiff, as would warrant restraining encashment of the bank guarantees?
10. Needless to add, that the aforesaid issues must be decided in consonance with the extant position of law in relation to invocation of bank guarantees.
11. To address these issues, it is necessary first to extract the relevant portions of the bank guarantees in question, in order to decide whether they were unconditional or not; and whether any mode, manner or procedure was prescribed for their invocation. It turns- out that the text of all 16 Nos. advance bank guarantees/mobilization bank guarantees/financial bank guarantees was more or less the same; and the text of all 08 Nos. performance bank guarantees was also more or less the same, though different from the wording of the advance bank guarantees.
CS(COMM) 323/2022 Page 16 of 28This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003
12. The typical wording of the relevant portions of the advance bank guarantees is the following:
"(We, IndusInd Bank Limited) ...do hereby undertake to pay OFB Tech Private Limited an amount not exceeding Rs.2,67,82,901/- (Rupees Two Crore Sixty Seven Lac Eighty Two Thousand Nine Hundred One Only) against any losses caused or damages suffered or which may be caused or suffered by OFB Tech Private Limited by reason of any breach by the said contractor of any of the terms and conditions contained in the said purchase order.
We, IndusInd Bank Limited (the Bank), do hereby undertake to pay the amounts due and payable under this guarantee without any demur merely on a written demand from OFB Tech Private Limited stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by OFB Tech Private Limited by reason of any breach by the said contractor of any of the terms and conditions contained in the said Purchase order or any other connected agreement executed between the parties or by reasons of the contractor's failure to perform the said contract. Any such demand made on the Bank shall be conclusive as regards the amount due and payable by the Bank under this guarantee and shall be restricted to an amount not exceeding Rs.2,67,82,901/- (Rupees Two Crore Sixty Seven Lac Eighty Two Thousand Nine Hundred One Only)."
***** "We hereby irrevocably agree and undertake to immediately, on your first written demand, credit the full amount(s) demanded from us (the "Demand Amount") to your Account Number:
002105023612, Bank Name: ICICI Bank Ltd. Branch Address:
SCO 18 & 19, HUDA Shopping Centre, Market Complex, Sector-14, Gurugram, Haryana-122001, Bank IFSC Code: ICICI0000021, Account Name: OFB Tech Private Limited or any other account as specified in your demand letter. Such payment, not exceeding Rs. 2,67,82,901/-(Rupees Two Crore Sixty Seven Lac Two Thousand Nine Hundred One Only), will CS(COMM) 323/2022 Page 17 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 be made by us to you, irrevocably and unconditionally, without any contestation, protest or delay on our part and without any demur, set off, counter-claims, deductions or withholding charges or taxes of any kind now or hereafter imposed, levied, collected, withheld or addressed by any governmental and/or any other authority whatsoever. However not exceeding the Guarantee Amount."
***** "The Bank agrees that the amount hereby guaranteed shall be due and payable to OFB Tech Private Limited on serving us with a notice before claim expiry of Bank Guarantee requiring the payment of the amount and such notice shall be deemed to have been served on the Bank either by the actual delivery thereof to the bank or by dispatch thereof to the Bank by registered post at the address of the Bank."
***** "Notwithstanding any provision contained herein above.
(a) .....
(b) .....
(c) We are liable to pay immediately under this Bank Guarantee only and only if we receive (if you serve upon us) a written claim or demand within the claim period i.e upto 08.06.2023, we shall be discharged from all liabilities under this Bank Guarantee irrespective of whether the original Bank guarantee is returned to us or not."
(emphasis supplied)
13. The typical wording of the relevant portions of the performance bank guarantees is the following:
"We, the Yes Bank, do hereby guarantee the amount recoverable by the Beneficiary in accordance with the said work order and other connected agreement(s) executed between the parties and/ or any interest thereon, if applicable. In case Customer fails to fulfill its commitments in accordance with the said work order and other connected agreements, we the said bank, hereby unconditionally and irrevocably undertake to pay to the CS(COMM) 323/2022 Page 18 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 Beneficiary on demand and without demur to the extent of INR 60,63,902.00 (Indian Rupees Sixty Lakh Sixty Three Thousand Nine Hundred Two Only) hereinafter referred to as "Guaranteed Amount").
We hereby irrevocably agree and undertake to immediately, on your first written demand, credit the full amount(s) demanded from us (the "Demand Amount") to your Account Number:
002105023612, Bank Name: ICICI Bank Ltd. Branch Address: SCO 18 & 19, HUDA Shopping Centre, Market Complex, Sector-14, Gurugram, Haryana-122001, Bank IFSC Code: ICIC0000021, Account Name: OFB Tech Private Limited or any other account as specified in your demand Letter. Such payment will be made by us to you, irrevocably and unconditionally, without any contestation, protest or delay on our part and without any demur, set off, counter-claims, deductions or withholding charges or taxes of any kind now or hereafter imposed, levied, collected, withheld or addressed by any governmental and/or any other authority whatsoever. In the event of any tax/other deductions being mandatory under law, the amounts being paid by us shall be grossed up/increased by us to ensure that you receive an amount equivalent to the Demand Amount, net of any such deductions. However, our liability under this Bank Guarantee shall be restricted to the Guaranteed Amount.
Any payment demand hereunder shall be made by you in writing stating thereon the Bank Guarantee number and the Demand Amount. We agree that the demand letter issued by you shall be considered as the operative instrument and no other written confirmation shall need to follow."
***** "It shall not be necessary for the Beneficiary to proceed against Customer before proceeding against the Bank and the Guarantee herein contained shall be enforceable against the Bank notwithstanding any security, which the beneficiary may have obtained or obtain from Customer shall at the time when proceedings are taken against the Bank hereunder, be outstanding or unrealized."
CS(COMM) 323/2022 Page 19 of 28This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 ***** "Notwithstanding anything contained herein above:
(i) .....
(ii) .....
(iii) We are liable to pay immediately under this Bank Guarantee only and only if receive (if you serve upon us) a written claim or demand at YES BANK Limited, SCO-4 Ground Floor, Sec-16 Faridabad-121001 within the claim period i.e. upto 06-AUG- 2023 (Claim Date) which is twelve months from the said expiry date. Thereafter, we shall be discharged from all liabilities under this Bank Guarantee irrespective of whether the original Bank guarantee is returned to us or not."
(emphasis supplied)
14. The next aspect which requires consideration is the manner in which defendant No.1 invoked the bank guarantees. To assess this, it is necessary to notice the relevant portions of the three invocation letters dated 09.05.2022, all of which were similarly worded. The relevant portion of a sample invocation letter is as under:
" ***** Through this letter, we hereby would like to intimate you that M/s KKSPUN India Limited has failed to fulfill its commitment in accordance with the said Purchase Order. Hence, we are left with no other choice but to invoke the above-mentioned BG with immediate effect."
***** "The proceeds of the Bank Guarantee accordingly may be remitted and the amount of Rs.5,67,82,901 be credited to our current account. Detail is below"
(emphasis supplied)
15. The settled legal position in relation to invocation of bank guarantees is not in dispute. A bank guarantee is a contract CS(COMM) 323/2022 Page 20 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 between the bank and the beneficiary, created at the instance of the person who gets the bank guarantee issued. Bank guarantees are invariably „unconditional‟ insofar as the commitment of the bank to pay the beneficiary is concerned. The nuance however, is as regards „invocation‟ of the bank guarantee, namely the mode and manner in which encashment of a bank guarantee is to be triggered, and payment is to be made under an unconditional bank guarantee.
16. It is also well accepted that a dispute between the contracting parties is of no relevance or consequence to the invocation of the bank guarantee by the beneficiary party. It is also the law that invocation must be in terms of the bank guarantee; and if there is a lapse on the part of invoking party in complying with the terms of invocation, the invocation itself will be bad in law. 18 It has accordingly been held that invocation of a bank guarantee must fulfill the requirements for invocation as contained in the terms thereof, failing which the invocation would be bad in law.
17. The other aspect with reference to which the invocation of a bank guarantee is to be tested, is the question of whether any „special equities‟ arise, which may impel the court to restrain invocation. Intrinsically, whether or not special equities arise, would depend on the facts and circumstances of each case.
18. The foregoing position of settled law notwithstanding, a bank guarantee is not a bearer cheque that a beneficiary can encash at-
18cf. Hindustan Construction (supra) CS(COMM) 323/2022 Page 21 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 will upon mere presentment. A bank guarantee is unconditional as to payment, but subject to it being validly invoked. It is not the prescription of law, that encashment of a bank guarantee must be permitted by a court „blind-folded‟. Where irretrievable injustice is likely to result, invocation of a bank guarantee can certainly be restrained.
19. As is evident from their text extracted above, the advance bank guarantees as also the performance bank guarantees are replete with the words irrevocable, unconditional, without contestation, protest, delay or demur, with their contextual and grammatical variations. It is clear therefore, that the intention of the parties is that payment by the bank to the beneficiary is to be unconditional and without demur.
20. At the same time however, the terms of a bank guarantee must be read as a whole, and it is also noticed, that:
(a) the advance bank guarantees are premised on payment:
"against any losses caused or damage suffered or which may be caused or suffered by" the defendant "by reason of any breach by" the plaintiff "of any of the terms and conditions contained in the purchase orders"; but
(b) On the other hand, payment under the performance bank guarantees is premised on a situation where the plaintiff:
"fails to fulfil its commitment in accordance with the said work order and other connected agreements".CS(COMM) 323/2022 Page 22 of 28
This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003
21. There are accordingly pre-conditions expressly embedded in the bank guarantees themselves, specifying the foundational circumstances that would govern the entitlement of the beneficiary to invoke a bank guarantee in the first place. This court must hasten to add that these foundational circumstances are however not to be assessed or adjudged by the bank, since that would make the bank the arbiter of the underlying disputes between the parties, with which the bank has no concern. However it is the concern of the bank to ensure that the foundational circumstances find mention in the invocation letters, since that is a pre-condition for invocation expressly stated in the bank guarantee itself. If a beneficiary invoking a bank guarantee does not even assert in the invocation letter that the foundational circumstances have arisen, such invocation would not be valid in law. To put it differently, there is no cavil with the proposition that money must be paid against a bank guarantee if validly demanded and a bank cannot refuse payment on the ground, say, of non-availability of funds to the credit of the party who got the bank guarantee issued, or subsequent cancellation at the instance of such party, or other such grounds; however the question is, are any circumstances specified in the bank guarantee upon which payment under it can be demanded ?
22. In the present case, it is noticed that the invocation letters, all of which are similarly worded, invoke the bank guarantees on the assertion that the plaintiff "...has failed to fulfil its commitment in CS(COMM) 323/2022 Page 23 of 28 This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 accordance with the said Purchase Orders". It is however clear, that invocation letters nowhere even aver that the demand is being made against any loss caused or damage suffered or which may be caused or suffered by the defendant. Defendant No. 1 only says that the plaintiff has "...has failed to fulfil its commitment in accordance with the said Purchase Orders".
23. It is seen therefore that the wording of the invocation letters is in-
line with the requirements of the performance bank guarantees but not in-line with the requirements of the advance bank guarantees.
Conclusions Apropos Advance Bank Guarantees:
24. As observed above, the invocation of the advance bank guarantees is not in accordance with the terms of the guarantees themselves. Additionally, insofar as the advance bank guarantees are concerned, defendant No.1 does not deny that the mobilisation advance given to the plaintiff has been adjusted against the purchase orders and it is based on such adjustment that defendant No.1 claims that the plaintiff has received Rs.94 cores, except that defendant No. 1 states that it has not adjusted the entire mobilisation advance against the goods supplied 19 . In fact defendant No. 1 claims that the plaintiff has received an excess amount of Rs.13 cores. Even assuming that the entire mobilization 19 cf. Para 7 of Brief Facts in Written Statement dated 02.06.2022 of Defendant No.1.
CS(COMM) 323/2022 Page 24 of 28This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 advance paid to the plaintiff has not been adjusted against goods supplied, permitting defendant No. 1 to invoke the advance bank guarantees in their entirety would imply permitting it to obtain adjustment of mobilisation advance against value of goods and to also claim encashment of security against mobilisation advance, namely to claim double-benefit in the same transaction, which the law would not countenance. In these circumstances, in the opinion of this court, there also appear to be special equities exist in favour of the plaintiff and against defendant No.1 against invocation of the advance bank guarantees.
Apropos Performance Bank Guarantees:
25. As observed, the invocation of the performance bank guarantees appears to conform to what is required in the text thereof. However, de-hors the wording of the invocation letters, it is seen that there is no material brought forth by defendant No. 1 to show that the plaintiff has failed to fulfil its commitments under the purchase orders. If anything, there is material on record, as also admitted by defendant No.1 in its written statement 20 , that defendant No.1 placed additional orders upon the plaintiff for supply of the same goods, which by all canons of ordinary commercial prudence, would not have been done if the plaintiff had either defaulted on its commitment under the original purchase 20 cf. Para 4 of Brief Facts in Written Statement dated 02.06.2022 of Defendant No.1.
CS(COMM) 323/2022 Page 25 of 28This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 orders or had supplied sub-standard goods. Curiously in para 4 of its written statement, defendant No. 1 says the following:
"4. That subsequently, the Plaintiff approached the Defendant No. 1 for increasing the scope of work of the purchase orders due to their inability to fulfil their commitment within the stipulated time frame. Accordingly, the purchase orders were amended on 18.12.2021, as the contracts were not completed within the stipu- lated time frame. It is relevant to note herein that the revised amount of the purchase orders, after execution of the addendum, was to a tune of Rs. 310 crores. Accordingly, the purchase orders were amened on 18.12.2021, as the contracts were not completed within the stipulated time frame. The Defendant was forced to enter into addendum to the purchase order, as the original bank guarantee were expiring."
(emphasis supplied) the logic of defendant No.1 being, that since the plaintiff had being unable to fulfill its commitment under the original purchase orders, additional orders to the tune of about Rs.60 crores were placed upon the plaintiff by amending the earlier purchase orders. This logic strains credulity.
26. While it is true that defendant No. 1 does say that a number of goods/materials supplied by the plaintiff were defective, defendant No. 1 also confirms that by reason of such defective goods, it issued to the plaintiff Debit Notes of about Rs. 3 crores but nothing more. Again, debit notes of about Rs. 3 crores do not justify defendant No.1 invoking bank guarantees to the tune of more than Rs.20 crores.
CS(COMM) 323/2022 Page 26 of 28This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003
27. Defendant No.1 also claims delay in supply of goods21; however, that notwithstanding, defendant No.1 has evidently deemed it appropriate to place further orders upon the plaintiff. Yet again therefore, defendant No.1‟s action in placing additional orders upon the plaintiff is counter-intuitive to defendant No.1 being aggrieved by the plaintiff‟s performance of its obligations under the original purchase orders.
28. Defendant No.1‟s contention that the plaintiff had failed to fulfill its commitment under the purchase orders, accordingly also does not inspire confidence.
29. Accordingly the basis for invocation of the performance bank guarantees also appears to be flawed.
30. In the above view of the matter, this court is of the opinion that the invocation of the bank guarantees by defendant No.1; and the encashment and release of monies against the bank guarantees by the banks (other than the State Bank of India) deserves to be restrained.
31. Accordingly, the present application bearing I.A. No.7704/2022 is allowed and I.A. No.9797/2022 is dismissed, thereby confirming order dated 13.05.2022 restraining defendant Nos.2, 3, 4 and 6 from releasing any amount against the bank guarantees as detailed 21 cf. Paras 3, 4 of Brief Facts and para 7 of Parawise Reply in Written Statement dated 02.06.2022 of defendant No.1.
CS(COMM) 323/2022 Page 27 of 28This is a digitally signed Judgement.
NEUTRAL CITATION NO: 2022/DHC/004003 in Document 7 filed with the plaint, during the pendency of the suit.
32. The applications are disposed of accordingly.
CS(COMM) No. 323/202233. List before the learned Joint Registrar for completion of pleadings and further proceedings on 06.10.2022, the date already fixed.
34. List before court thereafter.
ANUP JAIRAM BHAMBHANI, J.
SEPTEMBER 19, 2022 uj CS(COMM) 323/2022 Page 28 of 28 This is a digitally signed Judgement.